What are debtor days?
If you’re not familiar with the term, debtor days (also called days sales outstanding) is a way to measure the average number of days it takes to get paid after invoicing customers for services delivered. Professional service businesses that offer invoice payment terms, usually when selling to other businesses, don’t always get paid by the invoice due date. Research conducted by Moula found that 65% of SME customers don’t pay on time. This means that businesses that expect payments in 15, 30, 60 or even 90 days have to wait even longer for their money to come in. As a result, cash flow is negatively affected.
For example, a business that offers 30 day payment terms and gets paid 10 days late on average, its debtor days are 40. To learn more about debtor days, check out What Are Debtor Days and How Do You Calculate Them?
Debtor days for professional services businesses
Late payments affect all types of businesses that offer invoice payment terms when selling to other businesses. Research by Illion shows that the lateness of invoices varies between industries. For example, invoices are paid 8.4 days late on average to the forestry industry and 16 days late on average to the mining industry. For services industries, invoices are paid 10 days late on average. Surprisingly, accounting firms have exceptionally high debtor days in the professional service sector. Research revealed that the average debtor days for accounting firms is 53. As a result, cash flow is ranked at number 3 in the top five concerns for accounting firms. To learn more, download our white paper Decreasing Debtor Days: Strategies for Accounting Practices.
For other professional services firms, debtor days are even higher. For law firms, average debtor days range from 51 days to 92 days, depending on the size of the firm by revenue. In addition, like accounting practices, cash flow ranks as the number 3 top challenge for law firms. So although many businesses in the professional services industry focus on increasing billable hours, they have challenges with late payments.
What is the true cost of late payments?
Besides hampering cash flow, late payments can cost professional services businesses in many ways. There’s the time and cost involved in managing accounts receivable. There’s the interest cost of finance that’s needed to increase cash flow. There’s also the opportunity cost resulting from not having the funds to invest in business growth. Research presented in Healthcare Financial Management Magazine uncovered the true carrying costs of accounts receivable.
The numbers clearly show that businesses pay a high price for late payments.
Ways to reduce debtor days
Given the cost of high debtor days for professional services businesses, here are a few steps that can assist in reducing work in progress and debtor days.
Document credit policies and procedures
Clear credit policies and procedures will set the stage for lowering average debtor days and bad debts. These should outline payment terms and the steps to approve new clients, including completing credit checks, checking credit references and screening out risky clients. In addition, policies and procedures should include timeframes and action steps when accounts are overdue, such as when to stop additional work when invoices are overdue and when to refer debts to collection agencies. Documents can include email templates and phone scripts to use to follow up when payments are overdue. Documenting credit criteria and actions removes the emotions from decision making. Learn more in How to Protect Your Business with Credit Policies and Procedures.
Confirm fees upfront for professional services
Some late payments are the result of misunderstandings about fees and how they are charged. Fees and how they are charged should be clearly documented. One way to do this is to create a professional services agreement that the client signs before any work is started. Here’s an example of a free consulting agreement that can be customised to suit your circumstances.
Clearly communicate payment terms for new customers
Once a client has been approved for payment terms, it’s important to make sure that these are clearly communicated up front. This should be clearly stated in the credit application completed by the client to avoid misunderstandings about when work is invoiced and when payments are due. Having a documented credit policy from the beginning will prevent confusion that can delay payment.
Invoice regularly for professional services
With projects that take more time to complete, it might seem easier to wait and invoice at the end. This, however, will increase the time between staring on a project and getting paid. Progress billing will improve cash flow and avoid surprising the client with one large invoice at the end. Professional services businesses that use progress billing should make this clear up front when payment terms are agreed upon before taking on a client.
Bill immediately when work is completed
After completing a project or reaching a milestone, billing immediately creates a sense of urgency and enables the client to connect the invoice to the work completed. Invoicing monthly or fortnightly, instead of immediately when work is completed, will extend the time between starting work and getting paid.
Make it easy for clients to pay you
Making it easy to pay invoices will help to reduce debtor days. This includes offering several payment options, including bank transfers and credit cards. Make sure the amount, payment terms and payment options are clearly displayed on the invoice. Include contact details for clients to get in touch if they have any questions.
Automate accounts receivable
Automating reminders for overdue invoices is a proactive step that will reduce debtor days. Research revealed that reminders are effective for getting invoices paid. One study by ezyCollect, an accounts receivable software developer, found that 59 per cent of overdue invoices require three or more follow-ups before they’re settled. The research based on 213,000 invoices found that:
- 21 per cent of invoices are paid after the first follow up
- 20 per cent are paid after a second reminder
- 32 per cent are paid after the third reminder
- 13 per cent are paid on the fourth reminder
- 10 per cent are paid on the fifth reminder
- 3 per cent are paid on the sixth reminder.
So once the invoice goes beyond the due date without payment being received, it’s essential to follow up. Automating this step will prevent unpaid invoices from falling through the cracks and boosting average debtor days.
A new solution for professional services businesses for reducing debtor days
Professional services providers who offer invoice payment terms can overcome the problem of late payments. Moula Pay is a long-term solution that makes it possible to get paid straight away and reduces the costs of managing accounts receivable.
If you sell to other businesses and your customers pay with Moula Pay, you get paid upfront. At the same time, your customers get up to three months free from interest and repayments, or can take a longer-term repayment plan if needed.
Become a Merchant with Moula Pay to:
- Get paid upfront – give your customers excellent payment terms that improve your cash flow.
- Stop chasing payments – outsource the stress of chasing invoices, and let Moula take the risk of unpaid invoices.
- Sell more, more often – giving your customers access to more funds means they can spend more with you.
- Reduce the cost of accounts receivable – when your customers use Moula Pay, you no longer have the costs associated with managing their accounts.
Learn more about how Moula Pay can give your customers great payment terms, improve your cash flow, and save you from chasing late payments.